Economic Beat

Jobless Rate More Like 7.9%

Based on the Bureau of Labor Statistics measure of labor underutilization that includes involuntary part-timers, the official unemployment rate for July "should" have read 7.9% rather than 7.4%. The math in generating that 7.9% is fairly straightforward.

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Ever since Federal Reserve Chairman Ben Bernanke informed the world that the unemployment rate is one of his key barometers, that measure has received special scrutiny as a potential window into the Fed chairman's mind. Based on the July jobs data released Friday by the Bureau of Labor Statistics, however, another BLS measure of "labor underutilization" also bears watching.

On the jobs, rather than jobless, front, the July data were somewhat disappointing. Nonfarm payroll employment rose 162,000, below the consensus estimate of 185,000, with May and June revised down by 26,000. Over the first seven months of this year, gains in jobs have averaged 192,000, about in line with the first seven months of last year.

But if there were no signs of improvement over the job gains of last year, there was one apparent bright spot in the July report. The unemployment rate fell two-tenths of a percentage to 7.4%.

The bright spot was tarnished, however, by another trend in job-deprivation. Based on the BLS measure of labor underutilization that includes involuntary part-timers, the official unemployment rate "should" have read 7.9% rather than 7.4%. The math involved in generating that 7.9% is fairly straightforward.

The BLS keeps six measures of labor underutilization, "U-1" through "U-6," of which U-3 is the official measure. U-3 covers only those jobless folks 16 and older who have looked for work over the past four weeks. U-6 includes those folks and adds two other categories, often referred to as the "hidden unemployed." The first is the "marginally attached"—people who haven't looked for a job over the past four weeks, but have done so over the past 12 months. The second consists of the involuntary part-timers ("part-time for economic reasons," in BLS parlance)—people who work part-time, but are searching for full-time positions.

Naturally, U-6 has always been a lot higher than U-3, prompting many compassionate observers into championing U-6 as the more accurate measure of the "true" rate of joblessness. But while there are certainly hidden unemployed not captured in U-3, I have generally focused on the official measure, so long as it tracks U-6 within a reasonable range.

The trouble is, that range has been exceeded. But meanwhile, consistent advocates of U-6 might ponder the following. For 15 months from October 1999 through December 2000, U-3 fluctuated between 3.8% and 4.1%—by all accounts, a time when jobs were quite plentiful and the labor markets unusually tight. Yet through this same 15 months, U-6 ran between 6.8% and 7.2%, averaging 177% higher. And it turns out that, over the 235 months since January 1994 when the BLS began tracking U-6, the ratio between U-6 and U-3 has also been 177%. Over that period, the ratio has fluctuated between a low of 163%, in '02 and '03, and a high of 189%. When the ratio gets that high, U-6 may be trying to tell us something.

That high of 189% was reached just last month. In July 2013, U-6 was at 14%, and if you assume a "normal" ratio last month of 177%, then U-3 would be 7.9%, not 7.4%. Also, if you parse U-6 you find that, the reason it's unusually high is not because of the marginally attached, but because of the unusually high share of involuntary part-timers.